Key Points:

The Reserve Bank believes houses are now overvalued and can be expected to fall back to a lower proportion of average incomes in the next few years.

A graph in the December Reserve Bank Bulletin shows that payments on a 25-year mortgage of 90 per cent of the median national house price have reached a record of almost 50 per cent of the average after-tax household income - up from a long-term average of 36 per cent.

That's despite an increase in dual-

income households, which has pushed total household incomes up faster than average wages, but still not as fast as house prices.

"It seems that houses in New Zealand are now overvalued relative to the level that can reasonably be supported by household income," the bank says.

"Houses have simply become less affordable, and this is affecting demand. As demand eases, so will house price growth, and house prices can be expected to adjust relative to household income."